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Kellogg's Great Start

The company said its first-quarter earnings will be strong and improved its year forecast.

Kellogg(NYSE:K) served up some good news for shareholders yesterday, announcing that it is off to a "great start" for 2004 and expects first-quarter earnings to be up 30% from the $0.40 per share reported in the same period last year.

The breakfast foods and snack products giant likewise bumped up its 2004 earnings forecast to $2.07 to $2.11 from a range of $2.05 to $2.09. Kellogg attributed the strong first-quarter expectations primarily to double-digit sales growth, as well as a positive foreign exchange impact. In addition, Kellogg said first-quarter earnings will benefit from a delay in its ongoing "capacity rationalization" (or restructuring) initiatives.

Interestingly, Kellogg also pointed out that rationalization efforts are expected to have a larger negative impact on the bottom line than previously expected, reducing 2004 earnings by $0.10 to $0.12 per share. Indeed, such charges have become routine for the company over the past several years, and even predate its 2001 acquisition of Keebler. Charges related to streamlining amounted to $71 million in 2003, $48.3 million in 2002, $86.5 million in 2000, and $244.6 million in 1999.

Even with the restructuring, Kellogg's first-quarter sales growth and overall earnings confidence is a good sign, especially considering the firm has admitted that it is struggling to contain the rising costs of commodities used to make its snacks, including soybean oil, cocoa, and sugar.

The real test in the coming quarters may be in Kellogg's cookie segment, which has experienced softness due to intense competition and dieters' interest in low-carb foods. In response, Kellogg has poured resources into "wholesome" snacks, a higher-margin area that has shown promising growth. More details will surely be in the company's full earnings release later this month. For now, at least the upbeat numbers give investors something to chew on.